The rejuvenation of the outsourcing modelThe rejuvenation of the outsourcing model

September 2016September 2016

"In today's post trade environment, outsourcing service providers are now presenting themselves as 'complexity breakers', able to monitor sophisticated functions and provide global and integrated processes. On the other side, financial institutions are more confident that outsourcers can deliver the expected quality. Both can effectively partner, sharing more ambitious objectives."

Outsourcing has been a part of the post-trade environment for many years, but there is now a new momentum behind it. Not only medium-sized financial institutions, but also top tier banks and asset managers are becoming more ambitious in their approach towards outsourcing. They are looking to maximise efficiency, reduce costs per unit and focus more on core competencies by moving to an outsourcing solution or selecting a better one.

There are a number of drivers behind the renewed focus on outsourcing: the increasing complexity of the regulatory environment, cost constraints especially in IT developments, the intensification of competition in the post-trade world and the increasing quality and range of outsourcing services now available. Hence, the evolving regulatory environment is putting pressure on all financial institutions – buy side and sell side. Among these requirements are more detailed reporting, central clearing of an increasing number of asset classes and stricter rules regarding liquidity monitoring and management. The UCITS V Directive, EMIR, MIFID II, the Dodd-Frank Act in the US and similar moves globally are creating a complex landscape through which institutions must navigate.

The competitive environment is also evolving as financial institutions become more global in their outlook. Buy side and sell side firms are facing competition as they expand abroad but are also meeting competitors who are entering their own home markets. They are looking for ways to quickly and efficiently increase market share in order to be able to compete both in their home markets and internationally. Finding a global operational partner could be the solution.

Much of the new trend towards outsourcing can be attributed to a dramatic improvement in the quality and number of outsourcing solutions in the market. In order to outsource any functionality, a financial institution needs to have a good range of options and know that if something goes wrong there are alternative providers; they will not be trapped in a non optimal arrangement. With a wider range of outsourcing providers, financial institutions are also in a better position to negotiate contracts than they would be if only a handful of organisations offered services. In that scenario, the outsourcing provider would have unequal power in negotiations.

Back in early 2000, outsourcing migration projects were absolute nightmares and extremely risky. This has changed and the risk of failure has decreased. The improvement in outsourcing services is due to considerable investment by providers. One of the main areas that has been improved is client visibility; providers have made it easier for clients to monitor the outsourced functions and have given them more controls over processes. Consulting firms have also improved their methodologies to support and establish processes to manage and monitor large deals, making it possible, for example, to outsource the complete middle office function within a year.

In the past, one of the main hurdles to outsourcing was the perceived lack of control over processes. It was believed that once a function was handed over to a third party, the institution would lose control and expertise over that function. This is no longer the case as outsourcing service providers give their clients the possibility to see what is being done and also provide help with change management. This reduces the risk inherent in any such major change project.

Banks are investing in their own services and also strengthening their offerings by partnering with other specialist insourcing organisations. The methodologies of these specialists are being combined with the post-trade and banking expertise of banks to provide attractive and high quality solutions. Specialist insourcing companies are able to establish the most efficient outsourcing arrangements, drawing on considerable expertise and experience. They have invested heavily in globalising their offerings and covering every time zone. Consequently, they are able to offer their clients a global reach, which is increasingly important for buy side and sell side institutions. Societe Generale Securities Services, for example, has partnered with Accenture Post-Trade Processing to offer a Global Broker-Dealer Services outsourcing solution aimed at institutional brokers, mid-tier banks and broker-dealers. The fully integrated global service includes middle-office services, back-office processing and post-trade services. In this specific arrangement, Societe Generale Securities Services outsource to Accenture the management of all back office processes and IT architecture while Societe Generale handles directly the provision of banking services such as securities lending, Forex, execution and liquidity management.

Outsourcing service providers are increasingly specialising in the areas in which they will bring the greatest value. In a global market, no one provider can continue to supply everything that is required. While banks such as Societe Generale are providing outsourcing services to clients, they are also outsourcing functions to other providers, for IT arrangements. The emphasis is on maximising the quality of each component of the post-trade environment and delivering the best integration in the consolidated outcome. In partnering with other providers, there is a challenge to ensure integration of the components of an outsourcing offering is as efficient as possible. All of the components must work together and there are new technologies that can ensure this happens.

The steady improvement of outsourcing offerings is leading more buy side and sell side firms, including banks, to consider outsourcing middle offices in addition to the more traditional back office outsourcing arrangements or dealing services. Middle offices for banks and some asset managers were, until recently, considered too important to outsource. Middle offices are seen as the way to monitor the provision of post-trade services and are also very close to the client relationship; handing them over to a third party was previously considered too risky. But with the advances made in monitoring and controls, firms are more confident they can outsource entire middle offices without jeopardising the client relationship or compromising the quality of the post-trade services they provide.

In the past, a service that was considered core would not be outsourced. But as financial institutions come under greater regulatory, cost and competitive pressure they are forced to arbitrate the capital they can invest in, and review what brings more value between internal and external options.

Previously, one of the main determinants of selecting an outsourcing service provider was cost, but this has changed. While price will always remain a significant decision factor, other factors such as investment capability in global platforms, new technologies (including Blockchain, robotics and big data), regulatory and IT complexity are also playing their part.

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"In today's post trade environment, outsourcing service providers are now presenting themselves as 'complexity breakers', able to monitor sophisticated functions and provide global and integrated processes. On the other side, financial institutions are more confident that outsourcers can deliver the expected quality. Both can effectively partner, sharing more ambitious objectives."

Outsourcing has been a part of the post-trade environment for many years, but there is now a new momentum behind it. Not only medium-sized financial institutions, but also top tier banks and asset managers are becoming more ambitious in their approach towards outsourcing. They are looking to maximise efficiency, reduce costs per unit and focus more on core competencies by moving to an outsourcing solution or selecting a better one.

There are a number of drivers behind the renewed focus on outsourcing: the increasing complexity of the regulatory environment, cost constraints especially in IT developments, the intensification of competition in the post-trade world and the increasing quality and range of outsourcing services now available. Hence, the evolving regulatory environment is putting pressure on all financial institutions – buy side and sell side. Among these requirements are more detailed reporting, central clearing of an increasing number of asset classes and stricter rules regarding liquidity monitoring and management. The UCITS V Directive, EMIR, MIFID II, the Dodd-Frank Act in the US and similar moves globally are creating a complex landscape through which institutions must navigate.

The competitive environment is also evolving as financial institutions become more global in their outlook. Buy side and sell side firms are facing competition as they expand abroad but are also meeting competitors who are entering their own home markets. They are looking for ways to quickly and efficiently increase market share in order to be able to compete both in their home markets and internationally. Finding a global operational partner could be the solution.

Much of the new trend towards outsourcing can be attributed to a dramatic improvement in the quality and number of outsourcing solutions in the market. In order to outsource any functionality, a financial institution needs to have a good range of options and know that if something goes wrong there are alternative providers; they will not be trapped in a non optimal arrangement. With a wider range of outsourcing providers, financial institutions are also in a better position to negotiate contracts than they would be if only a handful of organisations offered services. In that scenario, the outsourcing provider would have unequal power in negotiations.

Back in early 2000, outsourcing migration projects were absolute nightmares and extremely risky. This has changed and the risk of failure has decreased. The improvement in outsourcing services is due to considerable investment by providers. One of the main areas that has been improved is client visibility; providers have made it easier for clients to monitor the outsourced functions and have given them more controls over processes. Consulting firms have also improved their methodologies to support and establish processes to manage and monitor large deals, making it possible, for example, to outsource the complete middle office function within a year.

In the past, one of the main hurdles to outsourcing was the perceived lack of control over processes. It was believed that once a function was handed over to a third party, the institution would lose control and expertise over that function. This is no longer the case as outsourcing service providers give their clients the possibility to see what is being done and also provide help with change management. This reduces the risk inherent in any such major change project.

Banks are investing in their own services and also strengthening their offerings by partnering with other specialist insourcing organisations. The methodologies of these specialists are being combined with the post-trade and banking expertise of banks to provide attractive and high quality solutions. Specialist insourcing companies are able to establish the most efficient outsourcing arrangements, drawing on considerable expertise and experience. They have invested heavily in globalising their offerings and covering every time zone. Consequently, they are able to offer their clients a global reach, which is increasingly important for buy side and sell side institutions. Societe Generale Securities Services, for example, has partnered with Accenture Post-Trade Processing to offer a Global Broker-Dealer Services outsourcing solution aimed at institutional brokers, mid-tier banks and broker-dealers. The fully integrated global service includes middle-office services, back-office processing and post-trade services. In this specific arrangement, Societe Generale Securities Services outsource to Accenture the management of all back office processes and IT architecture while Societe Generale handles directly the provision of banking services such as securities lending, Forex, execution and liquidity management.

Outsourcing service providers are increasingly specialising in the areas in which they will bring the greatest value. In a global market, no one provider can continue to supply everything that is required. While banks such as Societe Generale are providing outsourcing services to clients, they are also outsourcing functions to other providers, for IT arrangements. The emphasis is on maximising the quality of each component of the post-trade environment and delivering the best integration in the consolidated outcome. In partnering with other providers, there is a challenge to ensure integration of the components of an outsourcing offering is as efficient as possible. All of the components must work together and there are new technologies that can ensure this happens.

The steady improvement of outsourcing offerings is leading more buy side and sell side firms, including banks, to consider outsourcing middle offices in addition to the more traditional back office outsourcing arrangements or dealing services. Middle offices for banks and some asset managers were, until recently, considered too important to outsource. Middle offices are seen as the way to monitor the provision of post-trade services and are also very close to the client relationship; handing them over to a third party was previously considered too risky. But with the advances made in monitoring and controls, firms are more confident they can outsource entire middle offices without jeopardising the client relationship or compromising the quality of the post-trade services they provide.

In the past, a service that was considered core would not be outsourced. But as financial institutions come under greater regulatory, cost and competitive pressure they are forced to arbitrate the capital they can invest in, and review what brings more value between internal and external options.

Previously, one of the main determinants of selecting an outsourcing service provider was cost, but this has changed. While price will always remain a significant decision factor, other factors such as investment capability in global platforms, new technologies (including Blockchain, robotics and big data), regulatory and IT complexity are also playing their part.